Posted on 30 Jul 2024
*Rio Tinto, along with Chinese partners, to start production by end-2025
*Around 90-100 mnt of ore expected from Simandou by 2030
*Steel major Baowu secures long-term access to high-grade ore
*Seaborne market surplus expected to adversely impact prices
Morning Brief: The global iron ore market is set for a major overhaul with the world's largest, untapped high-grade ore deposit in the Republic of Guinea in West Africa expected to come into operations by end 2025 or early 2026. After several years of delay, the Simandou iron ore project, often apprehensively called the 'the Pilbara killer', is projected to incrementally boost global iron ore supplies through the latter half of this decade.
Simandou project
The integrated greenfield mine is divided into four blocks. The Winning Consortium Simandou (WCS), a grouping of Singaporean company, Winning International Group, Weiqiao Aluminium (part of the China Hongqiao Group) and United Mining Supply Group is the joint holder of Simandou North Blocks 1 and 2 (with the Government of Guinea holding a 15% interest in the mining vehicle and WCS holding 85%) and associated infrastructure.
Baowu Resources has entered into an agreement to acquire a 49% share of WCS mine and infrastructure projects through a Baowu-led consortium, subject to conditions including regulatory approvals. In the case of the mine, Baowu has an option to increase to 51% during operations.
Simfer Jersey Ltd. is a joint venture between the Rio Tinto Group (53%) and Chalco Iron Ore Holdings Ltd. (CIOH) (47%), a JV of Chinese State-owned enterprises CHINALCO, Baowu, China Rail Construction Corporation and China Harbour Engineering Company, which together hold the mining concession covering Blocks 3 and 4.
Under the co-development arrangement, Simfer and WCS will deliver separate infrastructure scopes. Simfer will construct the approximately 70 km Simfer spur rail line and a 60 mnt/year transshipment vessel port, while WCS will construct the dual track approximately 536 km main rail line, the 16 km WCS spur rail line and a 60 mnt/year barge wharf.
Reserves & expected production
The four blocks have total reserves of 4.1 billion tonnes (bnt), while the project's initial production capacity will be 120 mnt/year. First production from the Simfer mine is expected in 2025, ramping up over 30 months to an annualised capacity of 60 mnt/year (27 mnt Rio Tinto's share).
The Simfer JV's mine concession has a total estimated resource base of 2.8 bnt, of which Rio Tinto has reported the conversion of around 1.5 bnt to reserves that support a mine life of 26 years, with an average grade of Fe65.3% and low impurities. Rio has also reported mineral resources exclusive of ore reserves of 1.4 bnt at Fe66.1%.
Premium grade iron ore
While Simfer has received Guinean and Chinese government approvals to start extracting ore by late 2025 or early 2026, the WCS is yet to receive approvals. Rio Tinto Chief Executive Jakob Stausholm has said that Rio is "growing with discipline in the materials the world needs for the energy transition. Construction of the Simandou high-grade iron ore project in Guinea is advancing at pace".
Rio Tinto Executive Committee lead for Guinea and Copper Chief Executive Bold Baatar has informed: "Simandou will deliver a significant new source of high-grade iron ore that will strengthen Rio Tinto's portfolio for the decarbonisation of the steel industry."
The mine will initially deliver a single fines product before transitioning to a dual fines product of blast furnace and direct reduction ready ore. The impact on the DR-grade (above Fe67%) iron ore market is likely to be transformational as new supplies are pumped into the market from Simandou. The DR-grade market reportedly has a share of just 3% of global supplies.
However, sources informed BigMint that Simandou ore is not ideally suited for pelletising and will be predominantly used in the production of sinter for blast furnaces.
Interestingly, China's Baowu Group is a major stakeholder in WCS as well as in Simfer and might turn out to be the project's major beneficiary in terms of securing access to high-grade supplies for decades to come, potentially offering it a key lever to enhance energy efficiency and reduce emissions.
Baowu's consolidated steel production in 2023 stood at around 131 mnt and it is also a stakeholder with Mineral Resources and POSCO in the 35 mnt/year Onslow project in Western Australia. This allows it to flexibly choose its blending requirements from a choice of different grades.
Outlook on supplies, prices
BigMint data shows that global iron ore production in 2024 is expected to increase by 2% y-o-y to reach over 2.5 bnt, while global seaborne trade in the commodity stood at around 1.6 bnt in 2023. South Africa's iron ore production this year will be roughly 67 mnt while exports were roughly 60 mnt in 2023.
With production commencing at Simandou, Africa's seaborne exports are projected to rise rapidly - by some estimates over threefold till 2028-2030. While Rio Tinto has stated that Simfer's production will be ramped up over two-and-a-half years to an annual capacity of 60 mnt, Macquarie analysts believe the entire Simandou project will produce just 5 mnt in 2025, but closer to 75 mnt in 2027 and 90 mnt by 2028. Sources informed BigMint that Simandou's collective production may rise to over 100 mnt by 2030.
In such a scenario, the seaborne iron ore market will inevitably witness a surplus through to 2030 even as new mines proceed towards production in Australia and Brazil. Rio's Western Range joint venture with Baowu is now 70% complete and will deliver first ore in 2025. Replacement mines at West Angelas and Hope Downs are due to deliver first ore in 2027 while the Brockman 4 mine will start production in 2028. Brazilian mining giant Vale has also announced expansion projects.
Therefore, the impact on prices is hard to ignore, especially as seaborne supplies are set to outstrip demand. High inflation and policy rates globally weigh on commodity demand and China's steel capacity drawdown might aggravate the surplus thereby weighing heavily on prices.
Global iron ore prices have corrected significantly since the post-pandemic economic recovery in 2021 due to prolonged lockdowns and weak demand in China, not to forget the crisis in the country's construction sector. Global think-tanks predict iron ore prices might decline to as low as $70/t for standard Fe62% sinter fines by the end of this decade. Consistent decline in prices might also render it unviable for all suppliers on the higher end of the cost curve to continue operations as usual.
Source:BigMint
